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Fortune 500 Daily & Breaking Business NewsTue, 03 Mar 2015 20:19:16 +0000enhourly1http://wordpress.com/http://1.gravatar.com/blavatar/dab01945b542bffb69b4f700d7a35f8f?s=96&d=http%3A%2F%2Fs2.wp.com%2Fi%2Fbuttonw-com.png - Fortunehttp://fortune.com
Fortunehttps://s0.wp.com/wp-content/themes/vip/fortune/assets/images/fortunelogo.pnghttp://fortune.com250405 business calamities that delivered world-class entertainmenthttp://fortune.com/2014/12/25/5-business-calamities-that-delivered-world-class-entertainment/
http://fortune.com/2014/12/25/5-business-calamities-that-delivered-world-class-entertainment/#commentsThu, 25 Dec 2014 11:00:46 +0000http://fortune.com/?p=916800]]>The really special bankruptcies and frauds can be as rewarding to witness as a great tragedy on the stage, and for the same reasons. As the playwright Howard Barker wrote, “You emerge from tragedy equipped against lies. After the musical, you’re anybody’s fool.”]]>http://fortune.com/2014/12/25/5-business-calamities-that-delivered-world-class-entertainment/feed/0Enron: The Smartest Guys in the Room screenshotkacylburdetteEnron on trial (Fortune, 2006)http://fortune.com/2013/05/12/enron-on-trial-fortune-2006/
http://fortune.com/2013/05/12/enron-on-trial-fortune-2006/#commentsSun, 12 May 2013 17:17:44 +0000http://test-alley.fortune.com/2013/05/12/enron-on-trial-fortune-2006/]]>Editor’s Note: Every Sunday we publish a favorite story from our magazine archives. This week, former Enron president Jeff Skilling learned he may get out of jail as much as 10 years earlier than his original 24-year sentence. Fortune dominated the Enron story from its collapse in 2001 to the trial for the former executives. The following story was published on January 23, 2006, right before the trial started.

They stand together against the world: the poster boys of corporate malfeasance, the yin-and-yang former CEOs of Enron finally coming to trial in a drab federal courtroom in downtown Houston. But in truth, Ken Lay and Jeff Skilling never much cared for one another. The charming Lay wasn’t comfortable with Skilling’s sharp edges; the brainy Skilling considered Lay a lightweight glad-hander. And each has, at various points, sought to cast some measure of blame on the other for the 2001 bankruptcy of what was once the seventh-largest company in America–an implosion that wiped out 4,500 jobs and $70 billion of investors’ money while Lay, Skilling, and other top executives walked away with hundreds of millions of dollars.

Since that time, a SWAT team of prosecutors, FBI agents, and other experts have been trying to answer the question, Whose fault was it? So far they have charged 34 defendants and obtained 16 guilty pleas–including those from several key former Enron executives. But all that was prelude to the trial of Lay, 63, and Skilling, 52, which is set to begin on Jan. 30. The two men who were never friends are now locked together in deep mutual need–if convicted, the pair, once widely acclaimed as visionaries, could spend the rest of their lives behind bars. The trial, which may last into the summer, will be a critical event in American business history. The investigation has been the most exhaustive examination of a corporate crime scene ever conducted, and it is Enron–not Tyco, not WorldCom, not Martha Stewart–that has come to stand as shorthand for everything that went wrong in corporate America. The verdict will send a clear message about the accountability–or lack thereof–of those at the very top of a company. With only a modicum of hyperbole, Skilling’s lead lawyer, Daniel Petrocelli, calls the impending showdown the “most important, most high-profile, most must-win case that [the U.S. government] has ever prosecuted.”

For Lay and Skilling, there is even more at stake than guilt or innocence. They are seeking not just acquittal but public redemption. In most criminal trials the prosecution and defense have divergent views of reality, but in this case the difference is extreme: Lay and Skilling will argue not just that they weren’t hiding anything, but that there was nothing to hide. In an extraordinary speech last month, Lay declared that Enron was a “strong, profitable, growing company”–a “great company”–even into the fourth quarter of 2001. Enron, the two men say, was brought down by the actions of a rogue officer–former CFO Andrew Fastow, who has already pleaded guilty.

The trial will also be a fitting finale to the Enron saga, because in the end, the whole story is about betrayal. There is, of course, Enron’s betrayal of its investors, employees, and customers. But there will also be the spectacle of former executives, once united behind a smooth corporate fa?ade, turning against one another. Already, onetime friends have accused one another of lies and deception, and people’s versions of the truth have proved to be surprisingly malleable. Take Rick Causey, Enron’s former chief accounting officer who, as a co-defendant with Lay and Skilling, long swore to one version of reality and then–with a shocking, last-minute guilty plea just after Christmas–suddenly swore to quite another one.

Parts of the trial will doubtless be painfully dull, since much of the evidence will concern technical accounting issues. But it will be suspenseful right to the end, because convictions in white-collar criminal cases can be surprisingly hard to obtain (see following story). With Lay and Skilling’s high-priced legal talent, the complexity of Enron, and the mixed results in the criminal trials to date, there will be plenty of Twilight Zone moments when it will be hard to know what to think. So it may be helpful to recall, on the eve of the trial, four pivotal events that brought us to this bleak crossroads in American business.

AUG. 14, 2001

Skilling Takes a Hike

THE BEGINNING OF THE END at Enron actually dates back almost four months before the company’s bankruptcy filing–to the day when Jeff Skilling publicly announced he was quitting as CEO. For many people, both inside and outside Enron, that was when it became clear something was seriously wrong at one of America’s biggest companies. After all, men who have worked and schemed for years to reach the top don’t just quit after six months on the job. Enron’s stock fell 6% the next day, to $40.25. It would never close that high again.

Aug. 14 will probably loom large at trial, as prosecutors challenge Skilling’s longstanding claim that he was bolting entirely for “personal” reasons and had no idea Enron was on the brink of collapse. Despite later acknowledging that he was also rattled by the sinking share price (for Skilling, the value of the stock was personal), he has clung to that story, through a memorable 2002 public grilling by U.S. Senators until today.

But that’s not all. At trial, his defense team will try to show that Skilling–by many accounts a brilliant man who was calling the shots at Enron for years–believed what he has so often said: that Enron was “in great shape” when he left. Prosecutors are likely to point to his abrupt departure and his sale of 500,000 Enron shares just a month later as signs that he knew the company was going down.

Like Skilling, Ken Lay has presented himself publicly as both clueless and blameless. And like Skilling, he has insisted that, except for Fastow’s criminal misdeeds, there was nothing really wrong at Enron.

Those who knew Lay and Skilling at Enron have been struck by the irony of seeing them now marching in lockstep. The two men have never been close in business or temperamentally–Lay cultivated a conspicuously self-effacing charm; Skilling proudly wore his bristling intelligence like a set of spikes. During Enron’s glory years Skilling made little secret of his disdain for Lay, voicing his ultimate slight among colleagues: Ken just didn’t “get it.” The two men couldn’t even manage the events surrounding Skilling’s departure. While Lay publicly professed disappointment and shock at the news (“I certainly didn’t expect it,” he told reporters afterward), he had in fact known for weeks that Skilling was determined to go. And while Lay later claimed he did everything possible to get Skilling to change his mind, Skilling has told friends he was willing, if asked, to remain for six more months to ease the impact of his departure, but Lay made no effort to persuade him to stay.

Of course, but for Skilling’s resignation, Lay would never have reassumed his position as Enron’s CEO, and he probably would not be facing a criminal trial. After all, Lay’s indictment focuses on acts that occurred after he reassumed the role of CEO in August 2001. Prosecutors say that’s when he took over the ongoing scheme to mislead the world about Enron, because he learned the company was in deep trouble (“Lay was briefed by numerous Enron employees on Enron’s mounting and undisclosed financial and operational problems,” according to Lay’s indictment), and he was desperate to cover it up. It’s hard to imagine that Lay doesn’t blame Skilling for his current predicament. Skilling, in turn, has privately blamed Lay for failing to move decisively to save the company; as Enron spiraled downward, he unsuccessfully urged Lay to bring him back, arguing that he was the only man who could save the business. Their defense teams fought hard to have them tried separately. It will be riveting to watch these two peculiar bedfellows to see if any of the simmering tension breaks through the carefully composed picture of unity.

OCT. 24, 2001

Fastow Becomes the Enemy

TO KEN LAY AND Jeff Skilling, Enron’s CFO wasn’t always the bad guy. Indeed, Fastow was a longtime Skilling prot?g?, and Lay had always viewed him as indispensable. In fact, after Lay became CEO again, one of his early moves was to negotiate a lucrative extension of Fastow’s contract.

In his recent Houston speech, Lay repeated his claim that it was Fastow who had done in Enron, that it was the revelation of the CFO’s larcenous behavior–“the stench of possible misconduct by Fastow”–that had triggered the “run on the bank” that sank the company. This argument simply rewrites history. Fastow was indeed lining his pockets far more than Lay or Skilling knew–as it turned out, in illegal ways, to the tune of $60.6 million. But it wasn’t what Lay and Skilling didn’t know that panicked Wall Street. It was what the two men did know, and had repeatedly authorized: the notion that Enron’s CFO was doing private deals with his own company, and what those deals might be hiding about Enron’s financial condition. During the fall of 2001 investors weren’t worried about how much money Fastow had made or even stolen. They were panicking about how Fastow’s private off-balance-sheet partnerships might be inflating Enron’s earnings and hiding its debt. And rightly so.

Until late October, all of the Enron executives’ interests were aligned. Indeed, when a series of Wall Street Journal stories began spotlighting Fastow’s role running two partnerships known as LJM1 and LJM2, Lay vehemently defended Fastow and the arrangements in the face of a growing outcry. “I and the board of directors continue to have the highest faith and confidence in Andy and believe he is doing an outstanding job as CFO,” Lay declared during an Oct. 23 conference call with Wall Street analysts and investors.

The very next day, Fastow was gone.

Lay and Skilling will argue that there was nothing to hide. Former lieutenants Causey and Fastow pleaded guilty and have a darker story to tell.

So Oct. 24, 2001, marks the moment when Fastow’s interests finally began to diverge from those of Skilling and Lay. In early 2004, Fastow pleaded guilty to two counts of conspiracy and agreed to a ten-year jail sentence. But in his much-expected prosecution testimony–the first full airing of Fastow’s account–he is unlikely to embrace his former bosses’ version of reality. People who know Fastow, a temperamental man, say he is furious about the public efforts to blame him for Enron’s collapse. He will probably note that on three separate occasions Lay, Skilling, and the Enron board voted to waive the company’s code of conduct so that Fastow could run the partnerships. We may also hear Fastow repeat what he claimed in an internal meeting before he left Enron, that the private partnerships were Skilling’s idea.

JULY 30, 2004

Ken Rice Breaks Ranks

AMONG THE 77 PEOPLE on the list of potential witnesses for the prosecution, no one was closer to Jeff Skilling than Kenneth Duane Rice. A high school wrestler from Broken Bow, Neb., Rice broke into Skilling’s inner circle with a billion-dollar gas deal in 1992 that helped launch Skilling’s revolutionary ideas for energy markets.

In the years that followed, Rice became one of Skilling’s go-to men for key assignments, and a confidant who helped him lead daredevil expeditions–such as a 1,200-mile dirt-bike race through Baja, Mexico–that became symbols of Enron’s macho, risk- taking culture. But it was Rice’s reluctant role as CEO of Enron’s broadband business (accepting the job, he later said, was “probably the biggest mistake I could have made”) that placed him onstage in the investigation of Enron.

In commonsense terms, what happened at broadband was perhaps Enron’s most brazen illusion. Prosecutors have focused on a January 2000 analysts’ meeting at which Skilling touted broadband as the company’s hot new business, projected billions in operating profits, and declared that it merited a huge premium for Enron stock. Though Enron’s shares soared 26% that day, the company’s broadband business really wasn’t anything more than a grand, untested plan.

Using financial machinations, Enron had made its broadband business appear to be a valuable enterprise when it really wasn’t. In May 2003, Rice was among seven broadband executives charged in a 218-count criminal indictment that alleged conspiracy, securities and wire fraud, money laundering, and insider trading. (While the broadband hype helped Enron shares skyrocket, Rice had sold more than $53 million worth.) And for a year, Rice and his lawyers swore he’d done absolutely nothing wrong.

Then, on July 30, 2004, Rice cut his deal. Pleading guilty to one count of securities fraud for misleading securities analysts at the January 2000 meeting, he agreed to serve up to ten years in prison, forfeit $13.7 million in cash and property, pay a $1 million fine, and tell all.

That positioned Rice as a voice in court against his old dirt-biking buddy. Rice testified that it was at Skilling’s urging that he lied about the state of Enron’s broadband network to pump up the company’s stock–and that Skilling lied too. Skilling, he said, was determined to use broadband to add $10 billion to $20 billion to the company’s market value–“one way or another.”

Then something peculiar happened, illustrating how commonsense reality may be hard to explain in the courtroom. The broadband case was billed as a “mini-preview” for the showdown against Lay and Skilling, and Rice was the star witness against five former Enron executives who had refused to strike deals with the government. After three months of testimony focusing on technical questions about the state of Enron’s broadband technology and what analysts were led to believe, the case ended in a mistrial when the jury acquitted the men on some counts and hung on the rest, without rendering a single guilty verdict. The defendants are scheduled to face retrial on the remaining counts later this year.

The broadband case offers a clear message: What looks like deception may not amount to criminal fraud in a jury’s eyes, whether because the details are simply too complex or because one thing is not really the same as the other.

DEC. 28, 2005

The “Pillsbury Doughboy” Jumps the Fence

FOR NEARLY TWO YEARS after FBI agents first led Richard Causey, Enron’s former chief accounting officer, into the federal courthouse in handcuffs, he asserted his innocence, claiming that there was nothing wrong with Enron’s accounting. In doing so, he provided a valuable buffer for Lay and Skilling, who will insist they relied on his expertise–as well as that of outside lawyers and accountants–in concluding that everything Enron was doing was proper.

But three days after Christmas everything changed when Causey agreed to plead guilty to a single count of securities fraud, cooperate with government prosecutors, and serve up to seven years in prison. Was it a simple case of a CPA engaged in calculation, as attorneys for Lay and Skilling insisted? Causey, they asserted, committed no crime but knuckled under to government pressure, wishing to avoid the financial burden of defending himself at trial and the possibility of a much longer jail term away from his family. Or had he undergone a change of heart, recognizing that what he had done amounted to fraud?

Either way, Causey’s plea changes everything. For starters, it is addition by subtraction for the prosecution: By cutting out Enron’s chief numbers man, it makes the trial both shorter and simpler, minimizing the quantity of mind-numbing accounting testimony. Second, it adds Causey–known at Enron as the “Pillsbury Doughboy”–as a credible, likable witness against Lay and Skilling, with whom he had extensive personal contact.

What Causey has admitted, in a brief plea agreement, embraces the broad sweep of the government’s overarching claim against Lay and Skilling–that he conspired with the company’s “senior management” to inflate the company’s stock by lying to investors about Enron’s true financial condition. More specifically, Causey acknowledges signing financial statements that he knew misled investors about two transactions. One falsely characterized a one-time $85 million gain as the result of Enron’s recurring operations. In the second case Causey admits helping hide hundreds of millions in losses in Enron’s retail energy business by shifting them into the company’s highly profitable energy-trading unit. Both admissions involve criminal charges the government has filed against Skilling.

And this, certainly, is not all. Causey’s signed plea agreement characterizes the document as merely “a summary of facts that make me guilty,” adding, “It does not include all of the facts known to me concerning criminal activity in which I and other members of Enron senior management engaged.” In fact, Causey may well have something to add on most of the charges facing Lay and Skilling. No one was more in the thick of things, more intimate with Enron’s desperation, quarter after quarter, to make its Wall Street numbers. And no one was more versed in the tactics it employed–legal and otherwise–to do so.

EVEN BEFORE the company’s collapse it was always difficult at Enron to separate reality from illusion. What happens in the months to come in a Houston courtroom will provide, if not clarity, at least an ending.

REPORTER ASSOCIATE: Doris Burke

]]>http://fortune.com/2013/05/12/enron-on-trial-fortune-2006/feed/0srivathslakshmiPro-business forces confident after Supreme Court argumenthttp://fortune.com/2007/10/08/pro-business-forces-confident-after-supreme-court-argument/
http://fortune.com/2007/10/08/pro-business-forces-confident-after-supreme-court-argument/#commentsMon, 08 Oct 2007 21:52:33 +0000http://test-alley.fortune.com/2007/10/08/pro-business-forces-confident-after-supreme-court-argument/]]>[UPDATE: I originally wrote this post on October 8, but am now updating it on October 9 after attending the oral arguments in the case. The updated portions are indicated below in italics.]

On Tuesday morning the U.S. Supreme Court heard oral arguments in what has been widely described as both the most important business case of the term and the most important securities case of the decade.

Though everyone advises against making predictions based on justices’ questions at oral arguments, everyone does so anyway. For what it's worth, it seemed to me the Court was tending in the pro-business direction by about a 5-3 margin. (Justice Stephen Breyer did not participate.)

Chief Justice John Roberts stressed that in recent years Congress has been active in defining precisely which sorts of securities fraud actions private parties - as opposed to the Securities and Exchange Commission - should be allowed to bring, and that he felt the plaintiffs were asking the Court to "expand" upon those remedies. "We did that sort of thing in 1971," the Chief Justice said, "But we haven't now for some time."

The case, known as Stoneridge Investment Partners v. Scientific-Atlanta, will determine how easy or difficult it will be for plaintiffs lawyers bringing class actions for alleged securities fraud to sue third-parties in addition to the corporation that issued the stock in question. The third parties most frequently targeted are accounting firms, law firms, investment banks, and vendors who did business with the issuer.

Today, if third parties formally sign documents that are included in an issuer’s SEC filings — the way auditors do when companies file their annual reports — there is no question that they can be held liable as “primary violators” if they make false statements. But if their role is anything less direct than that, they can currently be sued, if at all, only under a controversial theory known as "scheme liability": I.e., they are accused of having committed acts with the "purpose and effect" of furthering the issuer's allegedly fraudulent scheme. In the Stoneridge case, the Court will either accept or reject “scheme liability” as a legitimate basis for suing third parties in private class-action suits. (The Court is not expected to rule until several weeks after the oral argument, at a minimum.)

In today's arguments, Chief Justice Roberts and Justices Anthony Kennedy, Samuel Alito, and Antonin Scalia all asked tough questions of Stanley Grossman of Pomerantz Haudek Block Grossman & Gross, who was representing plaintiff Stoneridge, while generally letting Stephen Shapiro of Mayer Brown Rowe & Maw, who argued for the defendants, off more easily. If Justice Clarence Thomas (who, as is his custom, asked no questions) votes with the other conservatives, that would make a majority. (Deputy Solicitor General Thomas Hungar also argued for the United States, supporting the defendant.) On the steps of the courthouse afterwards, former SEC commissioner Joseph Grundfest, the co-director of Stanford University's Rock Center on Corporate Governance, said - after stressing the usual provisos about the futility and inadvisability of making such predictions - that his count was at least 5-3, and possibly 8-0. (Grundfest had joined a friend-of-the-court brief opposing the concept of scheme liability.)At a stand-up interview being televised elsewhere on the plaza, Nina Totenberg told Stoneridge's counsel Grossman that, after watching the argument, she couldn't see how he could get five votes. Grossman replied, "I wasn't counting."

The recurring theme of the conservative justices' questions was that they could not see a practical difference between "scheme liability" and the older, more familiar theory known as "aiding and abetting" liability, which the U.S. Supreme Court barred private plaintiffs from invoking in securities fraud cases in the 1994 case known as Central Bank v. First Interstate Bank. Even Justice David Souter asked plaintiffs counsel Grossman at one point, "are you making a distinction that in the real world is not a distinction?"

On the other hand, questions from Justices Ruth Bader Ginsburg, John Paul Stevens, and, at times, Souter, too, suggested that they might still see room for a meaningful distinction to be drawn between the two concepts.

Six of the nine justices on the Central Bank court are still sitting. Three were in the majority that disallowed the aiding and abetting theory in that case - Justices Kennedy, Scalia, and Thomas - while three were among the dissenters: Justices Ginsburg, Souter, and Stevens. Justice Kennedy, who is often now seen as the Court's swing vote - because he is the most moderate member of the five-justice conservative faction - wrote the pro-business majority opinion in Central Bank.

More than 30 interested outside groups have submitted "friend-of-the-court" briefs. Briefs in support of the scheme liability concept have been submitted by several of the nation's largest pension funds, attorneys general for more than 30 states, major labor unions, AARP, the Consumers Federation of America, and the trial lawyers trade group, now known as the American Association for Justice. Briefs opposing the concept have been filed by the U.S. Chamber of Commerce, the major securities exchanges, the securities industry, accounting industry, banking industry, insurance industry, law firms, and law firm insurers. The Solicitor General of the United States has weighed in on the side of the business community - i.e., opposing the scheme liability concept - though it did so over the objections of the Securities and Exchange Commission, which voted, 3-2, to support the concept. (All key briefs are available here.)

Stoneridge specifically focuses on a fraud committed in 2000 by officials of cable operator Charter Communications (CHTR). (Several Charter officials ultimately pled guilty to criminal charges in connection with these acts.) To inflate its revenue, Charter asked two of its set-top box vendors, Scientific-Atlanta (a unit of Cisco (CSCO)) and Motorola (MOT), to bill it $17 million more than previously agreed upon, and then to use that extra money to buy advertising from Charter, which Charter then improperly booked as revenue. The vendors allegedly assisted in the scheme by backdating contracts and providing phony invoices and correspondence to help Charter deceive its accountants into approving the bogus revenue recognition. Neither vendor misrepresented its own finances to its own shareholders, and Charter's shareholders never directly saw any of the misleading documents prepared by the vendors.

In April 2006 the U.S. Court of Appeals for the Eighth Circuit (in St. Louis) rejected the scheme liability concept and dismissed Stoneridge’s case against the vendors. Two months later, the U.S. Court of Appeals for the Ninth Circuit (in San Francisco) came out the other way in a case known as Simpson v. AOL Time Warner, approving the scheme liability concept. (Time Warner (TWX) is the parent of Fortune‘s publisher.)

The most famous scheme liability case is one that is not directly before the Court, but whose presence will obviously loom large at the argument. After the Enron catastrophe, class-action impresario Bill Lerach filed a scheme liability case on behalf of holders of Enron securities against more than ten banks who had allegedly engaged in dubious transactions with Enron whose only apparent purpose was to help Enron draw up misleading financial statements. Lerach has already recovered $7.3 billion in settlements in the case from such banks as Citibank (C), J.P. Morgan Chase (JPM), and CIBC (CM). But in March 2007, the U.S. Court of Appeals for the Fifth Circuit (in Houston) ruled the same way the Eighth Circuit had, rejecting "scheme liability" and tossing out the case against the banks who had not yet settled, which included Merrill Lynch (MER), Credit Suisse (CS), and Barclays (BCS). (Lerach himself is scheduled to plead guilty on October 29 to conspiring to obstruct justice by bribing plaintiffs and deceiving judges in more than 150 shareholder class actions over more than two decades.)

The Stoneridge case is in one respect a very difficult case to decide but, in another, perhaps, quite easy. The difficult part is that, however the court rules, it will make a decision that works some real injustice to someone. If it rejects scheme liability, investors who have been hurt by mammoth frauds that have led to corporate bankruptcies will be unable to seek reimbursement from deep-pocketed third-parties who really do bear some responsibility for what happened to them. On the other hand, if the Court endorses the scheme liability theory, innocent third-parties will routinely and inevitably be joined as defendants in scores of frivolous cases and — having no way to get those cases dismissed at an early, inexpensive stage (i.e., on a "motion to dismiss") — will be induced to pay extortionate settlement payments.

The potentially easy part of the case is that it may have already been effectively decided 13 years ago. "Scheme liability" sounds an awful lot like "aiding and abetting liability" — i.e., the notion that plaintiff shareholders should be able to sue third-parties who aided and abetted the issuer's fraud. The U.S. Supreme Court rejected that theory, however, in its 1994 ruling in Central Bank v. First Interstate Bank. Though that 5-4 ruling was controversial at the time, Congress subsequently made its peace with that ruling — twice! In 1995, it restored by statute the right of federal prosecutors and the Securities and Exchange Commission to prosecute and sue aiders and abettors, but it specifically chose not to restore that right to private plaintiffs. Simply put, Congress decided that private securities actions were so subject to abuse that the costs to society of allowing private parties to sue alleged aiders and abettors were just not worth the benefits.

Congress then made exactly the same cost-benefit determination in 2002, when it passed the Sarbanes-Oxley legislation. Again it was asked to restore the right of private plaintiffs to sue aiders and abettors of securities fraud, and again it said no. Instead, it expanded the SEC's power to impose fines and disgorgements on aiders and abettors - i.e., forcing them to cough up their profits - and then empowered the SEC to distribute those sums to defrauded investors in partial reimbursement for their losses. (These sums are not, however, as much as private plaintiffs could recover; so far the SEC in the Enron case has recovered about $400 million for shareholders, compared to the $7.3 billion collected by Lerach.)

Obviously, the plaintiffs in Stoneridge (and Enron) claim that scheme liability is distinguishable from aiding and abetting liability; they claim that with scheme liability the third-party has to be shown to have played a slightly more active role in the fraud than had been required to establish aiding and abetting liability, although the precise definition of that magic extra oomph has varied depending on the court and the facts of the case. The defendants and their amici argue, on the other hand, that scheme liability is just a semantic ploy; it’s old wine in new bottles. For what it’s worth, to me scheme liability and aiding and abetting liability sound like one and the same thing.

In an earlier post on these issues, see here, I came down on the liberal side of this dispute, because of the unfairness of depriving shareholders of the right to sue parties who aided and abetted in the frauds that injured them. (There are very few other areas of the law where aiders and abettors are not liable to the same degree as principals.) But after reading many of the briefs from both sides in Stoneridge, I've changed my mind. These issues were decided in 1994, and Congress has twice consciously chosen not to overrule the part of that Court decision that barred private suits against aiders and abettors, which is what Scientific-Atlanta and Motorola really were (if anything) here. Congress decided — reasonably — that shareholder litigation is so fraught with abuse, and is such a grotesquely inefficient and ineffective way of reimbursing fraud victims, that it was wiser to leave the deterrence and punishment of aiders and abettors to the SEC and federal prosecutors.

Defendant David J. Bershad, 67, a named partner at the indicted class-action law firm now known as Milberg Weiss & Bershad, is expected to plead guilty to conspiracy to obstruct justice at 2 p.m. PT today in Los Angeles federal court. (At 2 pm ET, the U.S. Attorney’s office in Los Angeles confirmed this in a press release, and also released certain accompanying documents, including the information, the plea agreement , and the statement of facts. See more updates at end of post.)

By pleading guilty to non-fraud counts, Bershad appears to limit his sentencing exposure under the guidelines a range of 27 to 33 months. Because he is cooperating with the government, he will be eligible for a significant “downward departure” from that range.

Bershad’s plea relates to the core allegations of the indictment: misleading judges into believing that plaintiffs were not receiving any special, secret compensation from Milberg Weiss, when in fact they were. A “factual statement” accompanying the plea is also expected to unveil new details of the government’s allegations against the still unindicted “Partner A” and “Partner B,” who are widely assumed to be, respectively, name partner Melvyn Weiss and former name partner William Lerach. Lerach and the San Diego-based west coast office of Milberg Weiss split away from Milberg Weiss in 2004 to found Lerach Coughlin Stoia Geller Rudman & Robbins.

Lerach said last month that was considering retiring. (See posts here and here.) The Los Angeles Daily Journal reported on June 28 that Lerach and Weiss had each turned down a plea agreement that would have required each to serve three to four years in prison. (See earlier post here.)

Since the split, Lerach Coughlin has probably been the nation’s premier class-action firm, and it has thus far recovered more than $7 billion from various banks on behalf of Enron bondholders. Lerach has also been leading the fight, both in the press and in the courts, to have the U.S. Supreme Court recognize the concept of “scheme liability,” which was crucial to his recoveries in the Enron case. The concept is coming before the High Court next term in the case of Stoneridge v. Scientific-Atlantica, and Lerach has asked the Court to also review what remains of his Enron case, too, after a federal appeals court rejected scheme liability theory and dismissed the case against nonsettling banks Merrill Lynch (MER), Credit Suisse (CS), and Barclays (BCS).

Another character in the investigation, Steven Cooperman, is also scheduled to plead guilty of conspiracy to obstruct justice tomorrow morning at 9 a.m. Some details of his agreement have been known since January, however, when he filed a written plea agreement with the court. A former eye surgeon and frequent class-action plaintiff for Milberg Weiss, Cooperman kicked off the Milberg Weiss investigation in 1999, when he began talking to prosecutors in a bid for leniency after being himself convicted of an unrelated insurance fraud. For Peter Elkind’s November 2006 Fortune feature story about the whole Milberg Weiss investigation, click here.

UPDATE: According to the plea agreement, Bershad has agreed to forfeit $7.75 million, in addition to paying a fine of up to $250,000. The government has agreed to recommend a downward departure from the sentencing guideline range, which appears to me to be 27-33 months.

Bershad’s statement of facts refer to, but do not name, three more illegally paid plaintiffs in Florida, in addition to the ones already alleged in the indictment: Seymour Lazar, Howard Vogel, and Cooperman. Bershad says that he, Partners A, B, and E all personally delivered some illegal payments in cash. (A and B have previously been reported to be Weiss and Lerach, respectively, while E has previously been reported to be Robert Sugarman, who left Milberg Weiss in 1999 and was later granted immunity by prosecutors.) Bershad describes incidents that implicate co-defendant Steven Schulman, partners A and B, and two other Milberg Weiss partners described as F and G. He says that he, A, B, F and G contributed personal money to a fund that was used to make secret payments to plaintiffs, and that the partners were then effectively reimbursed by the firm through bonuses. The firm’s partnership agreement, first formalized in 1986, had provisions designed to facilitate this process, Bershad says. He also describes in some detail the $1.1 million payment to plaintiff Vogel in December 2003, which occurred while the firm was under investigation. Bershad says Milberg Weiss provided false information to accountants, tax preparers and the Interal Revenue Service in order to hide and disguise the illegal payments.

Here’s a statement from the defendant Milberg Weiss firm, issued at 3:09 pm:

“We understand that David Bershad will plead guilty today to conspiracy
to obstruct justice. Mr. Bershad had been on a leave of absence since
May 2006 and his relationship with Milberg Weiss LLP has been
terminated. His plea was not unexpected as we indicated in a statement
we released May 30, 2007 (and which is available onhttp://www.milbergweissjustice.com). We remain confident that his actions will
have no effect on the firm’s commitment to its clients and its ongoing
work to protect public shareholders and consumers. “

]]>http://fortune.com/2007/07/09/defendant-to-plead-guilty-today-in-milberg-case/feed/0srivathslakshmiFormal Lerach statement: “considering” retirementhttp://fortune.com/2007/06/01/formal-lerach-statement-considering-retirement/
http://fortune.com/2007/06/01/formal-lerach-statement-considering-retirement/#commentsSat, 02 Jun 2007 00:24:43 +0000http://test-alley.fortune.com/2007/06/01/formal-lerach-statement-considering-retirement/]]>We have just received a formal statement from the Lerach firm regarding earlier reports, including mine (see here), concerning his retirement. Here it is in its entirety. Below it is a statement, also just received, on behalf of Lerach Coughlin’s client, the University of California Regents, which is the lead plaintiff in the Enron shareholder litigation.
STATEMENT FROM LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP

As has been speculated on internet blogs and in newspaper articles, after 35 years of successfully practicing law, Bill Lerach is considering retirement. The investigation into allegedly improper activity at Milberg Weiss has continued for almost 7 years, and Mr. Lerach is cognizant of the fact that although our firm has never been a target of this or any other investigation, the investigation should not become a distraction to our firm and its ongoing work.

As the Honorable J. Lawrence Irving, former U.S. District Judge and Senior Counsel to Lerach Coughlin notes: “As a result of our high-profile successes, this firm and its partners have been a regular subject of rumors and speculation. It is important to note that our firm has never been under investigation. The outstanding lawyers in our firm will not be distracted from providing our clients with top-notch legal services.”

“If Bill Lerach retires, our firm will continue pursuing the largest ongoing corporate fraud cases in the country,” said Patrick Coughlin, co-founder of the firm. “No single firm has the depth or breadth of talent that our firm has, nor does any other firm have as many tough, high-profile cases on behalf of the largest public and private pension funds.”

STATEMENT FROM TREY DAVIS, UC Director of special projects:

“The University’s general counsel was informed earlier this week that Mr. Lerach is considering retirement. With respect to the ongoing Enron class action, the firm has a strong team of attorneys and experts in place, and we will continue to prosecute the case vigorously. We will ensure that continuity in pursuit of our goal of a fair and substantial recovery for investors is sustained should Mr. Lerach decide to retire.”

]]>http://fortune.com/2007/06/01/formal-lerach-statement-considering-retirement/feed/0srivathslakshmiReport: Class action king Bill Lerach to “retire”http://fortune.com/2007/05/30/report-class-action-king-bill-lerach-to-retire/
http://fortune.com/2007/05/30/report-class-action-king-bill-lerach-to-retire/#commentsThu, 31 May 2007 02:14:55 +0000http://test-alley.fortune.com/2007/05/30/report-class-action-king-bill-lerach-to-retire/]]>[This posting is written jointly by Fortune editor at large Peter Elkind and senior editor Roger Parloff]

The nation’s preeminent class action lawyer, Bill Lerach, 61, informed at least one major client this week that he would be retiring imminently from his firm, Fortune has learned.

The reason why Lerach, who heads San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins, would retire is not known. Lerach has been under scrutiny in connection with a federal investigation that has already led to the indictment of the firm Lerach formerly co-led, Milberg Weiss Bershad & Schulman, and to two name partners there, David Bershad, 67, and Steven Schulman, 55. That indictment, obtained by the U.S. attorney’s office in Los Angeles, alleges that Milberg Weiss paid $11.4 million in illegal kickbacks to three plaintiffs in about 180 cases over 25 years. All defendants have pleaded not guilty. (For Peter Elkind’s Fortune feature story on that investigation, see here.)

Lerach did not respond to a detailed voice message left with his receptionist this morning, a voicemail left at a home phone number, or to email messages sent to two different email addresses. Firm spokesperson Dan Newman also did not return a phone message, and phone calls or email inquiries to more than 50 partners in the firm’s San Diego office also went unreturned. Phone messages left with Lerach’s attorney, John Keker, were also not returned.

Lerach is best known at the moment for his role as lead counsel for the class of Enron debt and equity securities holders, a case in which he has already recovered about $7.3 billion for class members from such defendants as Lehman Brothers (LEH), Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM), CIBC (CM), and Enron’s outside directors. Three nonsettling defendants still in the case, Merrill Lynch (MER), Barclays (BCS), and Credit Suisse First Boston (CS), won dismissals of the case against them from a federal appellate court in March, but Lerach’s firm is seeking review by the U.S. Supreme Court. (See earlier post here.)

In recent years Lerach has also been involved in shareholder actions against Dynegy, Qwest (Q), WorldCom, and AOL/Time Warner (TWX). Time Warner, as the last company is now called, is the parent of Fortune‘s publisher, Time Inc.

In the criminal inquiry, Milberg Weiss’s founding partner, Mel Weiss, 71--regarded as the dean of the class-action securities bar--remains a target as well. Though neither man was charged, both Weiss and Lerach are reportedly referred to in the indictment, under the pseudonyms "Partner A" and "Partner B," respectively. Weiss attorney Ben Brafman did not return a phone call.

“As has been speculated on internet blogs and in newspaper articles, after 35 years of successfully practicing law, Bill Lerach is considering retirement. The investigation into allegedly improper activity at Milberg Weiss has continued for almost 7 years, and Mr. Lerach is cognizant of the fact that although our firm has never been a target of this or any other investigation, the investigation should not become a distraction to our firm and its ongoing work.

“As the Honorable J. Lawrence Irving, former U.S. District Judge and Senior Counsel to Lerach Coughlin notes: ‘As a result of our high-profile successes, this firm and its partners have been a regular subject of rumors and speculation. It is important to note that our firm has never been under investigation. The outstanding lawyers in our firm will not be distracted from providing our clients with top-notch legal services.’

” ‘If Bill Lerach retires, our firm will continue pursuing the largest ongoing corporate fraud cases in the country,’ said Patrick Coughlin, co-founder of the firm. ‘No single firm has the depth or breadth of talent that our firm has, nor does any other firm have as many tough, high-profile cases on behalf of the largest public and private pension funds.’ ”

]]>http://fortune.com/2007/05/30/report-class-action-king-bill-lerach-to-retire/feed/0srivathslakshmiTop class action lawyer won case, never told clients, they sayhttp://fortune.com/2007/05/14/top-class-action-lawyer-won-case-never-told-clients-they-say/
http://fortune.com/2007/05/14/top-class-action-lawyer-won-case-never-told-clients-they-say/#commentsMon, 14 May 2007 05:32:43 +0000http://test-alley.fortune.com/2007/05/14/top-class-action-lawyer-won-case-never-told-clients-they-say/]]>Warning: We are about to peek inside the class-action sausage factory; it’s not a sight for the squeamish.

Last October, three clients of the nation’s preeminent class action lawyer, Bill Lerach, got some good news and some bad news. The good news was that Lerach had won a $10 million settlement in the class-action case he’d filed for them back in 2001. The bad news was that he had won it two years earlier, had never told them about it, and that all the money from it had already been doled out, according to a motion the three clients filed in federal court May 4.

Lerach and partner Darren Robbins did not respond to emails sent Thursday seeking comment, nor did Lerach respond to a phone message left Friday. (Lerach is a big deal; he is currently the lead counsel for Enron securities holders who are suing Enron’s banks. He has won $7.3 billion in settlements so far in that case, and is now seeking U.S. Supreme Court review of a court’s dismissal of the remaining defendants: Merrill Lynch (MER), Credit Suisse First Boston (CS), and Barclays (BCS). Lerach is also currently under criminal investigation in connection with matters that have already led to the indictment of his former law firm, Milberg Weiss, and two name partners there. For details on that, see this award-winning feature story by my colleague Peter Elkind.)

The new claims about Lerach arise in a securities class action called Yusty v. Tut Systems, which Lerach filed in July 2001 on behalf of named plaintiffs Carlos Horacio Yusty, Andres Jaramillo, and Rodrigo Jaramillo. The case was brought in federal district court in Oakland, California. (The defendant tech company, Tut Systems, was acquired by Motorola (MOT) in March 2007).

In May 2004, the case was settled for $10 million, with 25% of that — $2.5 million — going for attorneys fees.

About 29 months later, in October 2006, named plaintiff Andres Jaramillo emailed his local lawyer, Bruce Murphy of Vero Beach, Florida, to ask about the status of his case. Murphy, who was the lawyer who had originally referred the case to Lerach’s firm, then forwarded Jaramillo’s email to Dave Walton, an attorney he dealt with there. Walton informed Murphy that the case had ended two years earlier, according to the May 4 filing, which Murphy submitted on behalf of Yusty and the two Jaramillos. (Walton did not respond to an email sent Thursday seeking comment.) Apparently all the settlement money had been distributed by then. (The three named plaintiffs’ stock losses together had come to $24,855, according to Murphy’s filings.)

Obviously, lawyers have an ethical duty to inform clients about a proposed settlement, so that the clients have an opportunity to object to it or, if they’re okay with it, file a claim form and get their share of the money. In an affidavit, Yusty and the Jaramillos claim they never got any notice of any kind. (According to court documents filed in 2004, the plaintiffs lawyers promised to send “individual notice” of the settlement to all class members “who could be identified through reasonable effort.” An outside claims administrator then certified that more than 5,500 class members were sent such notice, and that an announcement of the proposed settlement had also been published in one issue of Investor’s Business Daily.)

There’s a bit more. Murphy also says the Lerach firm stiffed him on a “referral fee” he was owed in the case — 10% of the attorneys fees, or, in this instance, $250,000 plus interest. In 1998, Murphy writes, he made an agreement with Lerach’s then firm, Milberg Weiss Bershad Hynes & Lerach, that he’d refer them shareholder cases in exchange for 10% of the fee. (The west coast office of Milberg Weiss — including all the lawyers handling the Yusty case — split away from that firm in May 2004, forming the firm now known as Lerach Coughlin Stoia Geller Rudman & Robbins.)

Murphy writes that Lerach’s firm paid him referral fees in least 16 cases over the years. (Referral fees are ethical if they are disclosed and the referring lawyer does some actual work on the case.) Murphy’s name appears as co-counsel with Lerach’s on the original complaint in the case, but Murphy alleges in his motion that Lerach’s firm “cut [him] off the service list” at some point, meaning that Murphy stopped receiving copies of the papers filed in the case.

You might think that with a dispute this unseemly, lawyers would try to settle it quietly and far from public view. Well, in an amusingly blunt footnote on the last page of his motion, Murphy offers a theory about why the Lerach firm hasn’t been willing to do so, though the theory may be being offered tongue-in-cheek. In the footnote, Murphy reminds the court that Lerach is currently under criminal investigation and that his former firm is under indictment for allegedly “paying illegal kickbacks to clients in class actions.” In that context, Murphy writes, “Lerach Coughlin needs the cover of an order to pay damages and sanctions” to Yusty and the Jaramillos.

On Thursday, May 31, Lerach Coughlin filed response papers to Murphy’s motion, which do cast the dispute in a very different light, though they still do not inspire confidence in class action notification procedures. Though Lerach Coughlin was listed as counsel for Yusty and the two Jaramillos in court records, the firm states that it “has never had direct contact with these three individuals and does not have addresses or telephone numbers for them.” It contends that only Murphy, who was originally listed as co-counsel for those three plaintiffs, had their contact information, and it suggests that Murphy did not want to share that information with the Lerach firm. The Lerach firm effectively contends, therefore, that Murphy should have monitored the case more closely — perhaps by looking in the electronic docket sheets online — even if he had been somehow cut off the service list in 2001, as he contends.

More significantly, the firm says that Murphy was told in April 2007, by the claims administrator for the Tut settlement account, that, even though the settlement funds had been fully “distributed,” there was still enough money in the account, due to interest earned, to pay Yusty’s and the Jaramillos’ claims, if Murphy simply filed the necessary paperwork on their behalf with the claims administrator. Inexplicably, the Lerach firm contends, Murphy has still failed to do so. (Murphy has yet not returned email and phone messages I left for him Friday, June 1, seeking comment.)

Accordingly, the Lerach firm contends, the dispute is not really about the plaintiffs’ recovery, but simply about the 10% referral fee Murphy claims to be owed. Lerach Coughlin claims there was never any such agreement. It acknowledges that Murphy referred the Yusty case to the Lerach firm, but says he played no role in litigating it beyond reviewing a copy of the complaint before it was filed. The firm has offered him $15,000 to settle his demand, the Lerach lawyers say, but Murphy refused. It notes that Murphy made a similar demand in a different case in 2004, and did ultimately settle that claim for $15,000.

]]>http://fortune.com/2007/05/14/top-class-action-lawyer-won-case-never-told-clients-they-say/feed/0srivathslakshmiRejecting Enron class action poses stark choice: Injustice for plaintiffs or injustice for defendants?http://fortune.com/2007/03/20/rejecting-enron-class-action-poses-stark-choice-injustice-for-plaintiffs-or-injustice-for-defendants/
http://fortune.com/2007/03/20/rejecting-enron-class-action-poses-stark-choice-injustice-for-plaintiffs-or-injustice-for-defendants/#commentsTue, 20 Mar 2007 15:33:00 +0000http://test-alley.fortune.com/2007/03/20/rejecting-enron-class-action-poses-stark-choice-injustice-for-plaintiffs-or-injustice-for-defendants/]]>Candidly conceding that its ruling “may not coincide … with notions of justice and fair play,” the U.S. Court of Appeals for the Fifth Circuit yesterday decertified the shareholder class action against the banks that allegedly helped perpetrate Enron’s frauds — a case that has already produced more than $7 billion in settlements. The ruling, if it is not overturned by the full appeals court or the U.S. Supreme Court, will benefit Merrill Lynch (MER), Credit Suisse First Boston, and Barclays (BCS), which had not settled, saving each potentially billions in liability.

Though the issues are complicated, and have lots of twists and turns, the heart of the problem has actually been apparent to most lawyers watching this case from the moment it was filed in 2002. Back in 1995, in a 5-4 ruling of the U.S. Supreme Court that shocked lawyers at the time — it ran counter to what every appeals court that had faced the question had previously assumed — the Court found that the securities laws did not create liability for those who “aid and abet” fraud (i.e., knowingly help others to commit fraud), as opposed to those who act as “principals” in such schemes. Even as they rendered that ruling, several of the justices in the majority acknowledged that the outcome of the ruling was unjust, and they urged Congress to fix the problem by amending the law to include aiding and abetting liability. In almost every other legal arena — including the criminal arena — aiders and abettors are treated as every bit as responsible as principals. (Indeed, the distinction between the two is often hard to draw.)

Congress never fully fixed the problem, however. It did allow the Securities and Exchange Commission to go after aiders and abettors, but not private plaintiffs attorneys. The reason is simple: it did not trust the latter to use good judgment in doing so; rather, it anticipated — no doubt correctly — that allowing aiding and abetting liability would result in banks, accountants, and law firms being routinely named in nearly every shareholder class action suit filed, no matter how frivolous. (Fittingly, the Enron case is brought by Bill “Partner B” Lerach, who is king of both the wheat and the chaff when it comes to class actions. He is lead counsel in the Enron case, and yet earlier in his career, for example, his firm also brought a series of civil RICO class actions against baseball trading card manufacturers for allegedly promoting gambling among children by giving away bonus trading cards in some, but not all, packs.)

But the omission leaves fraud victims uncompensated in obviously legitimate cases, like the Enron case, and may even help encourage such frauds to the extent that aiders and abettors are emboldened by their apparent immunity. The Enron case is the ultimate example. Here, banks allegedly — and, by now, the evidence against certain banks seems overwhelming — knowingly helped Enron manipulate its financial statements by engaging in numerous shady deals and sham transactions. It may well be that the banks felt free to do so at least in part because they thought they were immune from aiding and abetting liability.

When these suits were filed, the banks immediately brought motions to dismiss, claiming that the complaint only accused them of being, at worst, aiders and abettors in these frauds on Enron shareholders. (The bank officials had no direct fiduciary duty to Enron shareholders, the way the Enron officials did.) U.S. District Judge Melinda Harmon found a way around the obstacle at that time, ruling that the banks were so deeply involved here that they could be considered principals. And it was on the basis of that early ruling that shareholders have recovered, to date, more than $7 billion. (Which they can keep.) But yesterday that ruling finally received, in effect, appellate scrutiny (though in a slightly different procedural context), and was overturned.

The Fifth Circuit panel majority (one judge would have decertified the class on other grounds) was quite candid about the dilemma it felt the courts face, and that it believed the Supreme Court had already resolved in a direction that is harsh toward plaintiffs: “the rule of liability must be either overinclusive or underinclusive so as to avoid what [has been] called "in terrorem settlements" resulting from the expense and difficulty of, even meritoriously, defending this kind of litigation.” It’s a difficult call, but I actually come down on Lerach’s side on this one.